The estimated incremental cash flows are level so that you can use annuities instead of tables to solve this case. You will lose $10$ marks if you use tables instead of annuities.

Show all your work. Do not round off any intermediate calculations. Final dollar answers should be rounded to two decimal places. Unless otherwise indicated, final interest rate answers should be rounded to $6$ decimal places if expressed as a decimal or $4$ decimal places if expressed as a percent. You do not need to show $$trailing zeros$($i$.$e$.,$ if no non$-$zero digits remain, $2\mathrm{.}5\%$ will do instead of $2\mathrm{.}5000\%)$ but make certain there are none. Include a timeline for obtaining part$-$marks if you misinterpret the problem. State any assumptions that you believe you need to make in solving problems.

Junior and Sons. $($J&S$),$ is a manufacturing company that has been considering establishing an additional plant. A feasibility study costing $$2,000,000$ concluded that, for J&S to maintain its market share, they should expand. If the expansion project proceeds, J&S believes it can purchase land, building, and the required machinery for $$120,000,000.$ The cost of the building is expected to be $$75,000,000,$ while that of the machinery will be $$5,000,000.$ The building will be depreciated using the $20-$year IRS depreciation schedule $($to two decimal places$)$ where the first $5$ years have the following depreciation rates: $3\mathrm{.}75\%,7\mathrm{.}22\%,6\mathrm{.}68\%,6\mathrm{.}18\%,$ and $5\mathrm{.}71\%.$ The machinery will be depreciated using the $7-$year schedule found on the MACRS table $($distributed in class$).$ The land is not considered amortizable and, as such, will not be depreciated. Because of changing market conditions, J&S believes that the competitive advantage associated with the expansion will last only $5$ years so after $5$ years J&S is prepared to close the new facility and pursue other opportunities. At the end of the five years J&S intends to sell the land for an amount equal to its purchase price, to sell the building for $$60,000,000,$ and write$-$off the equipment for no value.

Incremental pre$-$tax revenues associated with the expansion project are estimated to be $$35,000,000$ for the first year of the project and are expected to rise at $5\%$ per year for the remainder of the project. Incremental pre$-$tax expenses associated with the expansion project are estimated to be $$10,000,000$ for the first year of the project but are expected to decline at $4\%$ per year for the remainder of the project. $($Assume the cash flows associated with these incremental revenues and expenses will occur at the end of each year.$)$

J&S $$s working capital will most certainly rise if the project proceeds. An estimate proposes that the project$-$related additional working capital requirements by year will need to be the following:

Year $0$: $$4,000,000$

Year $1$: $$5,000,000$

Year $2$: $$6,000,000$

Year $3$: $$3,000,000$

Year $4$: $$1,000,000$

Year $5$: $0$

An unfortunate choice associated with the chosen location for the plant is the relatively high cost of labor. J&S believes that this will result in increased labor costs at its other manufacturing plants across the country. J&S intends to phase in these increased costs over a $2-$year period, and estimates that it will have to add $$2,000,000$ in payroll costs in the first year of the project and add an additional $$2,000,000($i$.$e$.,$ a total of $$4,000,000$ above pre$-$project levels$)$ in the second year of the project. In further expects that the increased payroll costs at its other plants will then continue indefinitely. Assume the cash flows associated with these additional payroll costs will occur at the end of each year.

J&S $$s income tax rate is $40\%,$ and it has decided that an appropriate discount rate for this type of project is $14\%.$ Conduct an NPV analysis to determine if J&S should proceed with its expansion plans. $($Assume that all cash flows and the costs of capital $($the discount rate$)$ are given in nominal terms.$)$

Worksheet & Supporting Calculations:

a$)$ What is the impact on the NPV of the project of the $$2,000,000$ feasibility study? $(1$ mark$)$

b$)$ What is the impact on the NPV of the project of the investment in land, building and new

equipment? $($Ignore the effect of any possible tax shields and salvage$)(1$ mark$)$

c$)$ What is the impact on the NPV of the project of the net working capital requirements associated with the project? $(3$ marks$)$

d$)$ WhatistheimpactontheNPVoftheprojectofthetaxshieldsassociatedwiththeuseoftheassets in the project? $(3$ marks$)$

e$)$ What is the impact on the NPV of the project of the salvage of the assets at the end of year five?

$($Ignore the effect of any lost tax shields.$)(2$ marks$)$

f$)$ What is the impact on the NPV of the project of the incremental revenues associated with the project? $(3$ marks$)$g$)$ What is the impact on the NPV of the project of the incremental expenses associated with the project $($excluding the increased payroll costs at J&S $$s other plants$)?(3$ marks$)$

h$)$ WhatistheimpactontheNPVoftheprojectoftheincreasedpayrollcostsatJ&S $$sotherplants$?(3$ marks$)$